Industry Committee on Dec. 5th, 2024

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

Thank you, Mr. Chair.

Dr. Jenkin, I'm going to ask you to answer yes or no to my first question, please. It will be faster.

As part of this study, a number of witnesses have testified before the committee. They said that credit cards were strongly promoted by financial institutions, even though they don't necessarily meet consumers' needs. More specifically, despite the assessment of the consumer profile, the bank would push a customer to get a credit card when it does not meet their needs. We were also told that the financial institutions' sales technique was very aggressive and that access to credit was very easy with little verification. Are you seeing the same thing?

[Dr. Michael Jenkin]

I hate saying yes or no because everything's more difficult than just yes or no, but yes, we've heard the same issues about pressure tactics not just for credit cards but for a whole range of financial service products offered.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

It wouldn't necessarily meet the consumer's needs. Is that what you're saying? Okay.

Again, I would ask for a yes‑or‑no answer to my next question. High interchange fees, which are borne by small retailers, can be passed on in the sale price of products. Ultimately, the consumer has to pay those fees, particularly those who pay in cash or by debit card. Is that correct?

[Dr. Michael Jenkin]

Yes, there's a lot of cross-subsidization going on.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

As a result, the most vulnerable consumers pay the interchange fees and credit card rewards of the wealthiest. Is that the result?

[Dr. Michael Jenkin]

Yes, there's a lot of benefit that goes to wealthier consumers on these schemes that my colleague here just mentioned. It's the lower income consumers who pay for it, because they frequently don't have those kinds of cards and they certainly don't get those benefits.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

How do financial institutions justify increasing credit card interest rates, which can be as high as 15%? Are these rates unique to Canada? You obviously can't give me a yes‑or‑no answer. I would therefore ask you to explain it to us.

[Dr. Michael Jenkin]

We haven't done a study of credit card interest rates in other countries, but certainly the Canadian situation has been a long-lasting one. It predates the pandemic. It predates the 2008 financial crisis. It goes back decades where the cost of credit from a credit card is usually one of the highest you get if you're a consumer for unsecured credit, short of payday lending or those other kinds of things.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

I assume you're familiar with Quebec's Consumer Protection Act.

[Dr. Michael Jenkin]

Yes.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

First, are Canada's current regulations outdated? In addition, would a model based on the Quebec legislation be worthwhile or relevant?

I'm thinking here of lowering a rate that is considered usurious, but also of the duties placed upon merchants when it comes to assessing consumers' ability to pay.

[Dr. Michael Jenkin]

I'm familiar with the Quebec regime, but I'm not familiar enough to know whether.... I mean that knowing how effective the legislation has been in the field is hard to determine right now. We don't have good data on the impacts. Notionally, it seems like a good idea, but it's very difficult getting the industry, short of direct regulation, to adjust their rates to a more reasonable level. Banks, I think, regard credit cards as a very profitable and important part of their earning profile.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

How much time do I have left, roughly?

[The Chair, Liberal, Joël Lightbound]

If you want, you still have a little time. You have about a minute.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

Knowing Dr. Jenkin's penchant for more substantive and highly fascinating responses, I'm going to take advantage of that.

Dr. Jenkin, what's your opinion on the arrival of new credit products, such as rent‑to‑own or buy now, pay later offers?

[Dr. Michael Jenkin]

We're very concerned about that. We're doing work on it right now. It seems like initially, from the consumer perspective, an attractive thing. You want to buy a big item, and you get this immediate credit where you can pay it off in, say, four installments. It looks attractive, and you don't accumulate interest, but God help you if you miss a payment.

It seems almost like they're structured in many cases to encourage people to take on more debt than they should and then default, and then end up being charged very high penalty rates for not paying on time.

This is something that we are very concerned about, because it seems to be growing very quickly. It's not just the banks that are doing this kind of stuff, but lots of retailers—Amazon. You'll see many offers of this “buy now, pay later” kind of opportunity. It looks superficially like a good deal, but it's very easy to end up paying more than you think if you can't maintain the payment schedule right on time. If you fall in arrears, it can cost you significant sums of money.

[The Chair, Liberal, Joël Lightbound]

Thank you very much.

Mr. Masse, the floor is yours.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

Mr. Jenkin, one of the reasons I asked for this study was that there was also a participatory part of this Parliament and the government to shift consumer purchasing during the pandemic. We went to more credit cards and other types of purchasing power. We've seen online purchasing increase and so forth. There hasn't been much of a regulatory response or an acknowledgement that we've shifted consumer spending to different types of things. What I want to be specific about is more people are using credit cards to purchase groceries and common items that would be more associated and historically related to cash purchases.

Do you have any comments about consumer spending on items that are predominantly historically linked to immediate needs and the welfare of a family? The borrowing practice has upwards of 20% to 30% interest rates and other types of associated fees. Those wouldn't have otherwise been part of consumer debt, because they used other types of payment, predominantly cash.

[Dr. Michael Jenkin]

We raised this in some detail in the paper that we handed to the committee in mid-November.

We are very concerned about these trends where instruments that traditionally consumers understood.... Things you buy on credit cards, like less frequent purchases, larger sums and stuff you save up for to some extent as well.... What's happening now is that instruments that were designed for that kind of market are now being used to buy groceries.

Traditionally, if people used an electronic transfer for groceries, they'd use a debit card. It would come out of their bank right away and there was no potential for accumulating a debt. Now we're moving into a situation where we have a raft of instruments that consumers are using for very different reasons than they did 15 years ago.

That's why we say it's very important at this stage of the game to have a reassessment of the protection regimes we have in place and, to some extent, a re-education of consumers about the debt implications they fall foul of when they use things like credit cards for everyday expenditures and get pushed.

We've seen it in the last couple of years with the pandemic. The big impact has been on very stretched household budgets for essential things like food, energy, shelter costs and so forth. The temptation, because it's now become ubiquitous, is to use credit instruments like cards, which shift those daily expenditures into what would be effectively debt accumulation.

It's very worrying. I think that's one of the things we have to face up to now. We're in a different world than we were even five years ago.

[Brian Masse, NDP, Windsor West, ON]

That's where I also look at productivity. For the creation of a tomato that goes all the way from the production, transportation and distribution, and then the value of our financial markets just to move some money around electronically to purchase that, it seems rather inefficient and a rather large expenditure, especially if it also consumes personal debt beyond the original price. That's inefficient for our economy and for competition.

I haven't brought in Mr. Kholodenko. I have a quick question before I run out of time.

Questrade had to do extensive marketing in the mass media with regard to your product line. At least, I've noticed that. Was that specifically because of the difficulty of entering the Canadian market as a competitor to some of the traditional trading that was there? What was required for you to make that type of a breakthrough? Is that a model that maybe squeezes some of the other Canadian alternative financial elements?

Mr. Abou Daya can't even use his product in Canada, which is absurd. What about the ones that can, but still require extensive commitments of their budgets just to be heard?

[Edward Kholodenko]

We're Canadian founded, Canadian owned and Canadian operated. We're headquartered here in Toronto, Ontario. It took some time for us to get up and going and to be able to make our way into the financial services landscape. It's not easy competing against some of the largest financial institutions in the world.

Certainly Canada is, as everyone knows, an oligopoly. In order to be heard—you're absolutely right—we have had to make ourselves heard. We did launch a mass advertising campaign. Thankfully, today the Questrade brand is very well known, but we had to work our way up to that. We had to become profitable, stay profitable, operate profitably and accumulate the budget necessary to do that. It's not an inexpensive endeavour, as you could imagine.

[The Chair, Liberal, Joël Lightbound]

Thank you very much, Mr. Masse.

Mr. Généreux, you have the floor.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you very much, Mr. Chair.

Thank you to the witnesses. This is a very interesting discussion.

Mr. Kholodenko, I'm going to continue along the same lines as my colleagues. At Questrade, according to your website, you conduct transactions with a minimum value of $4.95.

I like concrete examples. Let's say I have $200,000 in RRSPs right now and I give it to you. How much will I pay in transaction or management fees? Right now, it's costing me several hundred dollars. I imagine it will depend on each transaction I make. If I understand correctly, your customers have to conduct their own transactions; they decide which stocks or exchange-traded investment funds they invest in.

From what you said in your remarks, the money people don't pay in fees adds to their savings, which makes them grow. Can you explain to me how I can save money using your services?

[Edward Kholodenko]

Again, we pride ourselves on going direct to the consumer and providing the best value for the service that we have. Compared to other incumbent products, our fees are much lower. You save the increment, the difference between what you pay at a regular mutual fund, and the mutual fund fees are not transparent.

Just like I was mentioning earlier, the interchange fees, the mutual fund fees, are paid on the back end and collected by the financial institution that issues that mutual fund. Those mutual fund fees are some of the highest in the world, up to 2.5%. At our company, you're right, you can either do it yourself, you can invest in a financial product yourself, in a stock or an ETF, which is kind of like a mutual fund, or we have another product where we can manage your money for you and charge you a much smaller fee to do that compared to a full-service provider.

The difference in the savings would be something that you could reinvest back into your RRSP, and that would grow, as we say, up to 50% more.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

My comments will be similar to Dr. Jenkin's. When consumers manage their own investments, the level of risk depends on what they are willing to take on.

I saw on your website that people can get advice on how to invest from adviser bots. Of course, there's always a risk associated with that. People can see their savings grow as a result of a good move, but they can also fail miserably.

Is there a way to prevent these things? Does your bot use AI to help people? How does that work exactly?